Supply and demand have the ability to adapt to changing market conditions, called elasticity. Today, practically no section of the economy can do without this concept: the theory of the company, the analysis of supply and demand, economic cycles, economic expectations, international economic relations, etc.
The market sensitivity to these and other market factors is characterized by a special coefficient of demand elasticity. The meaning of this indicator is as follows: how much in quantitative terms the volume of demand changes when the market factor changes by 1%.
Depending on the chosen unit of measure, the ability to react one of the economic variables to changes in another is illustrated by various methods. Therefore, to unify the choice, use the percentage measurement method.
The coefficient of elasticity of demand is calculated in two ways based on:
- arc elasticity ( arc elasticity ), for which it is necessary to know the initial and subsequent levels of prices and volumes;
- point elasticity (elasticity at a point) for a given demand function and initial price levels and demand values.
Types of elasticity of demand are differentiated by price, income, and it can also be cross-linked for two goods.
The price elasticity coefficient of demand reflects how quantitatively demand changes when it increases or decreases by 1%. In this case, the following elasticity options can be qualified:
- inelastic demand - characterized by lower growth rates of the purchased quantity of goods than the rate of decline in prices;
- elastic demand - characterized by the fact that when the price decreases by 1%, demand increases by more than 1%;
- single elasticity - characterized by the same growth rate of the purchased quantity of goods and falling prices.
The coefficient of income elasticity of demand reflects how quantitatively demand will change when income becomes more / less by 1%.
If this indicator is negative, then this most likely indicates a low quality of the product, because income is increasing, and demand for products is decreasing.
With its positive value, the product can be considered normal, and:
- if its value is extremely small, less than 1, i.e. Since the demand for a particular product grows more slowly than income, then we can talk, most likely, about essential goods;
- if the value of the indicator is greater, then this is inherent in luxury goods, since income growth lags behind the demand for goods.
The coefficient of elasticity of cross-demand reflects the change in demand for a product A, if the price of product B changes by 1%. It can be positive, negative and zero.
- Positive values of this coefficient of elasticity relate to substitute goods (interchangeable) that compete in the market, for example, butter and margarine. With increasing prices for margarine, the demand for butter is growing, because it has become cheaper in relation to the new increased price of margarine. And the more two goods are interchangeable, the greater the value of this indicator.
- Negative values of this coefficient refer to related benefits (complementary), they are used together. For example, if we consider shoes and their care products, then with an increase in the price of shoes, the demand for these products decreases, that is, we can say that an increase in the price of some good brings with it a reduction in the consumption of the other, and the greater their complementarity, the greater the absolute coefficient value.
- The zero value of this indicator of elasticity refers to benefits that are neither interchangeable nor complementary, i.e. in this case, there is no relation between the consumption of one good and the price of another.